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us stock market, trend trading stock
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4/24/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- More selling as volume edges higher on a late-session rush to the door.
- Earnings: investors growing weary of so-so results and half-promises about the future?
- Consumer confidence down, but April Redbook retail sales are higher.
- Team Trades.
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THE SUMMARY
Selling strengthens late in the session.
It was a pretty lazy day as an early rally attempt faded, but volume was not very high. Then with an hour to go the selling pressure increased and we saw many stocks start to tumble on the highest volume of the session. That closed all indexes down on higher, but still below average volume. Higher volume selling is one of the primary red flags on any pullback after a move higher. The late selling indicates there were some investors, perhaps funds, unloading shares before the close.
Volume was higher, but it was not complete dumping - - yet.
We have to note that volume remained below average on the NYSE and was still very much below average on the Nasdaq. Compared to the buying volume last week, the rise in selling was small. It does show a trend to sell, however, and we will need to wait for new positions until the stocks and indexes hold at support or break down on even stronger volume.
That was an interesting point today. We kept looking for stocks that were really leading the market lower as we have seen the big techs do in the past when the selling was getting started. Yes, DELL, CIEN, JDSU, CHKP and JNPR were down on rising volume, but there were pretty specific stories relating to each (earnings by CPQ, JDSU hurting networkers, and CHKP's earnings disappointing). In other words, selling was targeted at the bad news stories. NVDA did come flying back down on strong, above average volume, trading in a $12 range on the session. That is not a good sign as the success or failure of leading stocks as they breakout is one small story that can tell the larger story of the market. It is still above its pivot point, but it deserves close attention both from the market perspective and current holdings.
The majority of stocks, however, continued their small pullbacks on continued light, below average volume while holding above support. The list is long: ADBE, SEBL, EXTR, MSFT, GMST, MERQ, ONIS, etc. It is a long list. Moreover, the indexes still held above support for now, the VXN shot to an all-time intraday, and there just was not a lot of damage done.
So, we be patient and watch what stocks do from here. We are looking at upside and downside plays tonight in order to be ready for what the market gives us. The higher volume is a concern and it may undo the rally. We look back to the January 3 surprise interest rate cut, and it was followed by three sessions of selling that cleared out the quick profit takers and launched the January rally. This action is similar, though volume was slightly higher today, unlike the third and final selling session in early July. The volume is our concern, and we need to see the indexes hold at support as discussed below, rising on a return of even higher volume. Then we can move into upside plays again.
Earnings getting old?
More than half of earnings have been reported, and about 57% are beating expectations. Some are saying that is not the kind of improvement that needs to be registered to sustain a move based on earnings. If the move is based on current earnings, that could very well be true. But, stock prices look at least 6 months into the future, and that puts us out almost to third quarter earnings. Thus, earnings this quarter are not the real focus as is evident by the focus on future guidance.
Some are saying things look to be improving just as they did last week. Tonight AMCC was in line but it did say revenues were going to hit bottom in the second quarter. LSI said that 'indicators point to a resurgence of revenues.' VZ reiterated its full guidance for the year. Still, there was no rush to these stocks after hours. Investors could be getting to that saturation point where what spurred them to buy stocks earlier in the season is now met with 'so what?'
JDSU decided to warn 2 days before it reported earnings. That will surely avoid upsetting shareholders (being facetious there). This is another one of the big names to warn, and while the damage was not widespread (limited to networking for the most part), it is a continuation of the Cisco story.
THE ECONOMY
Consumer confidence dropped hard in early April, falling to 109.2 (113 expected) and 116.9 in February (revised higher). That matches February's performance which was the lowest in 4.5 years. There was a 12-point drop in current situation views, and that is a sharp drop.
The last two months have averaged over 150,000 job cuts, way up from any of the previous months. Even December was over 100,000. These are at recession levels. Jobless claims this week should be interesting; expect them to be higher, close to that 400,000 level that is a pretty decent call for recession.
Semiconductor book to bill hit the street and it was weaker than expected. It was the third lowest level ever and the second fastest drop ever with bookings down 22.6% and total billings down 11.2%. That dumped further water on the semiconductors today, accounting for some pretty hefty drops in the recent movers (e.g., NVDA). This indicates that there is still considerable weakness to work through in the chip market despite some slightly upbeat views of the future we heard last week from INTC, AMD, and others.
Finally, so better news. For the first two weeks of April, the Redbook retail sales report showed a 1.2% rise in retail sales. Discounters such as Wal-Mart showed some improvement as warmer weather helped get shoppers out after a wet, cold March. Still, COST just warned, and WMT has already said the first quarter is weak. This increase is good, but it does not show that the consumer confidence numbers are wrong as some were suggesting today based on the idea that the poor confidence number did not reflect the Fed rate cut and the subsequent market rally. We have said it before: confidence is driven by job security, not a Fed rate cut. Many blame the Fed for the problems we have today; they don't have a lot of faith in the Fed to bail them out.
Summary: The economic news will get most likely get a bit worse in the near term before it gets better. The consumer is losing faith, corporate America is still cutting jobs and trying to find the bottom. If the second quarter is the bottom, however, that puts third quarter earnings in better stead, and the market tends to look ahead that far at least. We are going to find out if this rally is forward looking in the next couple of days.
THE MARKET
Overall market stats:
VIX: 32.46; +0.96. The VIX is reflecting the relatively mild decline in the S&P 100 as volatility just drifts higher. Above 30 again, but not much else to take from it.
VXN: 79.95; +1.58. Volatility hit 82.14 intraday, the highest level it has ever hit. This is getting even more interesting. Selling has not been severe even though today the Nasdaq sold down on slightly higher volume. Yet volatility is spiking to highs on this rather mild selling. Anxiety remains high even in the face of a market rally. This is not a primary indicator, but it is telling us that there are many investors unsure of the rally. That is a real positive. If the Nasdaq can find support at 2000 tomorrow, it has a good chance of continuing a solid rally.
Put/Call ratio (CBOE): 0.70; +0.10. Rising on the selling, but the index has already hit the critical levels back in the dark days of January and February. 1.173 million options on the CBOE (1.36 million Monday).
NASDAQ: Selling down further as volume edged higher, the Nasdaq tried to trade above the 50 day MVA, but failed. It is holding above its 10 day MVA and support at 2000. This is an important stand here.
Stats: Down 42.71 points (-2.1%) to close at 2016.61.
Volume: 1.984 billion shares (+7.5%). Rising volume, but still slightly below average on the selling. A silver lining in the selling, but that does not mean it won't ramp higher if the selling continues. That will be the key moving forward as to which direction our plays take. Down volume led 1.437 billion to 532 million upside shares. That is a better mix than Monday where down volume was 1.567 billion to 259 million shares to the upside.
A/D and Hi/Lo: Declining issues continued to lead, but just 1.09 to 1 (1.65 to 1 Monday). New highs rose to 78 (+21) while new lows rose to 58 (+18).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq tried to rally, but it had no power behind it. The lazy trading turned to harder selling in the last hour, and that is when the volume rose over Monday's volume. Late selling, heavier volume selling is not a good sign for the next session, but it will give the index a chance to see if support actually holds. We are looking at the 2000 level or the 10 day MVA at 2006.61.
Dow/NYSE: It tried to rally over the 200 day MVA, but did not make it, sliding back on rising volume as well. Still in decent shape.
Stats: Down 77.89 points (-0.7%) to close at 10,454.34.
Volume: NYSE volume climbed to just below average levels at 1.214 billion shares (+17.9%). This was a stronger volume surge than on the Nasdaq. Down volume came in at 678 million versus 517 million shares. Down volume overtook up volume in the last hour. Not the price/volume action we wanted, and we do not what to see any acceleration.
A/D and Hi/Lo: Advancing issues actually overtook decliners on the NYSE 1.02 to 1. Not great, but an interesting turn on a down day. New highs climbed to 101 versus 30 new lows.
The Chart: http://www.investmenthouse.com/cd/$dja.html
Tried to run over the 200 day MVA on its high (10,636.91), but that was early in the session before the sellers took over after the first two hours. Selling was fierce in the last hour, and that will likely bleed over into tomorrow. That makes us look lower toward 10,300 if the index cannot reverse three session of selling on some serious volume. Not just a reversal on lighter volume; we need to see the reversal on higher, above average volume. If it is on low volume, what we are likely getting is a chance to set up some put plays to the downside that will probably start when the index hits the 200 day MVA and rolls over (10,615.99). It has not done it yet, and we need to remain patient. The upside pattern is still strong; it can recover from here, but we need to be ready for the downside.
S&P 500: The big caps cracked just below the 50 day MVA on the close today (50 day MVA at 1211.87) on rising NYSE volume. The index is holding over the 10 day MVA at 1206.22 and 1200, the next level of support now that the 50 day MVA has been breached. As with the Dow, the overall pattern remains intact; the question is the volume that jumped higher today on the selling. It could even push it down to the 18 day MVA at 1193.08 and the double bottom would still be intact. If the selling volume continues to rise, however, that would indicate the move is over. Accordingly, we have prepared a potential OEX put play as well.
Stats: Down 14.89 (-1.2%) to close at 1209.47.
Volume: NYSE volume jumped 17.9% to 1.219 billion shares.
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
New and existing home sales come out one-half hour into the trading session tomorrow. They are expected to be slightly lower. We believe they will be lower than expectations based upon what we have heard from the housing market insiders we know and what is actually happening: migration out of high tech regions. Once that is over, and we think it is ending, we anticipate this stalwart of the economy to fade. We hope we are wrong, but that is what we believe we are seeing. Durable goods sales will be out before the open and they are expected to swing almost a point higher to 0.5% versus the 0.4% loss last month. May be wishful thinking given the retail softness we are seeing.
The economy is the thing that can turn the tide of the recent optimism when INTC and others said the second quarter looked like the bottom. If the economy tanks further and further, that could tarnish the new hope and send the market lower. Markets look out 6 months or more but this is an emotional time. Tonight they were again talking about 'what if the Fed stops cutting rates?' The Fed is not going to stop now. It knows it has to get the real rate down below the 2 year note, and that would be below 4%, preferably at 3.5%. But this is the problem that we often encounter: the Fed does what it needs to do, and then after a time investors and pundits start doubting if the Fed is going to keep going, whether companies know what they are talking about, etc.
That gives the bears the wedge the need, and with today's opening, fully expect to see them take a run at the market tomorrow. They were selling hard in the last hour, and they will try to do more tomorrow now that they sense the rally is at a critical juncture. If they get the momentum, if the warnings continue with no convincing, positive statements about the future, the bears may win and push the indexes below support. That changes the ballgame and shows we were in a bear market rally. While we don't see any really weak patterns in individual stocks necessarily, we will look at the OEX, QQQ, and DJX to play the downside. If the market is heading lower, play the market down.
Conversely, if the indexes are able to catch themselves at the supports we are looking at and move higher tomorrow on above average volume, preferably substantially higher volume than today, the move would appear to be intact. We will see several of the stocks mentioned above jump up off support, and others breakout of their bases. We need to be ready for each move as the indexes are approaching the lick-log point.
Support and Resistance Levels
Nasdaq: Closed at 2016.61.
Resistance: 2250, then 2290 to 2300. It is very congested in this range (thicker ice).
Support: 10 day MVA at 2006.61. Then 2000.
S&P 500: Closed at 1209.47.
Resistance: 1265 to 1270.
Support: The 10 day MVA is at 1206.22. 1200 is a possibility after that.
Dow: Closed at 10,454.34.
Resistance: Right under some real congestion from 10,750 to 10,900.
Support: 10,500 did not hold. 10,300 to 10,250 after that, but it did not hold on the way up.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
4-24-01
Consumer Confidence, April (10:00): 109.2 actual versus 113.0 expected and 116.9 (revised lower from 117.0).
4-25-01
Durable Orders, March (8:30): 0.5% versus -0.4% prior.
Existing Home Sales, March (10:00): 5.1M versus 5.18M prior.
New Home Sales, March (10:00): 910K versus 911K prior.
4-26-01
Initial Claims, 4/21 (8:30): 385K versus 385K prior.
Employment Cost Index, Q1 (8:30): 1.1% versus 0.8% prior.
Help-Wanted Index, March (10:00): 71 versus 71 prior.
4-27-01
GDP-Adv., Q1 (8:30): 0.9% versus 1.0% prior.
Chain Deflator-Adv., Q1 (8:30): 3.0% versus 1.9% prior.
Mich Sentiment Rev., April (10:00): 89.0 versus 87.8 prior.
TEAM TRADES
ADBE's alert went off at 8:37 when the stock hit 44. The stock had pulled back the previous session to close just above its 10 day MVA and just below a couple of recent intraday highs (43.35 and 43.65), and we were looking for a bounce from the lower support at 42.42 for taking positions. The stock had performed well recently with a strong breakout and good-looking test, so looked good for a move up from here.
It raced to a high of 44.18 with the Nasdaq negative (-8.38). The stock pulled off a high of 44.23, back to 44.01 in the next 2 minutes, holding above the high noted above (43.65). On a solid move back up from here we would look at buying some options. Volume was looking okay at 193,000, moving up pretty well (avg. volume is 6.3 million, however, so the stock had a way to go; we wanted to see volume beat that of the previous session, which came in at 3 million).
The stock tanked back to 43.50, so we put our sights on the 10 day MVA at 42.42 for a bounce back up from that support on good volume. The July $35 options were trading at 12.20 by 11.80. By 8:58 the stock was at 43.12 with the Nasdaq down 13 points. ADBE tapped a low at 43 twice, testing the support just as we thought it would, with volume up to 436,000. Still low but clipping up, so we decided to go ahead and take some positions since the support looked good and we felt like the stock would move up from here. The options were now back down to 11.80 by 12.10, so we put in a limit order at $12.
The stock then raced up to 44.44, volume at 508,000, Nasdaq now positive at +2.02. An hour later the stock had come back down to 44.35, volume at 1.37 million. Stalling a bit, with the stock pulling back on lower volume at this time. We put in a stop loss at 10.
1:46pm Volume 2.59 million; stock at 43.39. Options at 12.20 by 11.90. By market close the stock was at 42.73, still holding above the 10 day MVA (42.32), options 11.60 by 11.40. That put us in negative territory on our investment, but we're holding the positions for a move back up as long as ADBE holds here. The Nasdaq was continuing to pull back and volume was a bit higher, as it turned out to be on the stock, but we like the hold at the 10 day MVA. As the market does, so do 75% of stocks.
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End Part 1 of 2
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